ACF 353 Intermediate accounting I
Regulatory & conceptual
framework
Beatrice Osei
bosei.knust.ksb@gmail.com//bosei@knust.edu.gh//0501364541
Regulatory framework
Objectives
Understand the need for regulatory
framework
Have knowledge on IASB
Standard setting process
Issues with global harmonization
Arguments for or against IFRS
The need for a regulatory framework
Regulatory framework is the framework within
which accounting is reported
The regulatory framework is the most important
element in ensuring relevant and reliable
financial reporting and thus meeting the needs
of shareholders and other users
Local regulations issues GAAP for each country
The need for a regulatory framework
Regulatory/professional accountancy bodies
such as ICA-G in Ghana are responsible for
such local regulations
There are differences of form and contents of
published financial standards of most countries
As a results of differences in culture, tradition,
taxation policies, financing policies etc
The need for a regulatory framework
Comparability then becomes an issue in the international
environment
Users of accounting information are globally connected
and should be able to understand and trust FS issued in
other countries
Multinational companies will have to produce different
FR to suit investors (shareholders)in the different countries
they are located
The need for a regulatory framework
Cost of preparation
Loss of quality of such reports
The International Accounting
Standards Board (IASB)
The need for common set of Accounting
standards led to the formation of IASB in 2001
It was established as an independent private
sector regulatory body that develops and
approves International Financial Reporting
Standards (IFRS)
The IASB’s role
They are responsible for:
Preparation and issuing of IFRS
Approving and issuing interpretations
developed by the IASB’s interpretation
committee
The IASB’s objective
‘’develop in the public interest a single set of high
quality, understandable and enforceable global
accounting standards that requires high quality,
transparent and comparable information in the
financial statement…
To promote the use and rigorous application of the
standards
The structure of IASB
IASB foundation
IASB
IFRS Advisory Council
IFRS Interpretations Committee (IFRSC)
Due process oversight committee
The standard setting process
During the early stages of a project, IASB may
establish an Advisory Committee to give advice on
issues arising in the project. Consultation with the
Advisory Committee and the Standards Advisory
Council occurs throughout the project.
IASB may develop and publish Discussion Documents
for public comment.
The standard setting process
Following the receipt and review of comments, IASB
would develop and publish an Exposure Draft for
public comment.
Following the receipt and review of comments, the
IASB would issue a final International Financial
Reporting Standard
International Accounting Standards
IAS 1 (revised) Presentation of financial statements
IAS 2 Inventories
IAS 7 Statements of cash flows IAS 8 Accounting
policies, changes in accounting estimates and errors
IAS 10 Events after the reporting period
IAS 11 Construction contracts
IAS 18 Revenue
IFRS 15 Revenue from contracts with customers
IAS 12 Income taxes
IAS 16 Property, plant and equipment
IAS 17 Leases
IAS 19 Employee benefits
IAS 20 Accounting for government grants and disclosure of
government
assistance
IAS 21 The effects of changes in foreign exchange rates
IAS 23 (revised) Borrowing costs
IAS 24 Related party disclosures
IAS 26 Accounting and reporting by retirement benefit plans
IAS 27 (revised) Consolidated and separate financial statement
IAS 28 Investments in associates
IAS 29 Financial reporting in hyperinflationary economies
IAS 30 Disclosure in the financial statements of banks and
similar financial institutions
IAS 31 Interests in joint ventures
IAS 32 Financial instruments: presentation
IAS 33 Earnings per share
IAS 34 Interim financial reporting
IAS 36 Impairment of assets
IAS 37 Provisions, contingent liabilities and contingent assets
IAS 38 Intangible assets
IAS 39 Financial instruments: recognition and measurement
IAS 40 Investment property
IAS 41 Agriculture
IFRS 1 First time adoption of International Financial
Reporting Standards
IFRS 2 Share-based payment
IFRS 3 (revised) Business combinations IF
RS 4 Insurance contracts
IFRS 5 Non-current assets held for sale and
discontinued operations
IFRS 6 Exploration for and evaluation of mineral resources
IFRS 7 Financial instruments: disclosures
IFRS 8 Operating segments
Harmonization versus standardization
Harmonization tends to mean the process of
increasing the compatibility of accounting practices
by setting bounds to their degree of variation.
Standardization tends to imply the imposition of a rigid
and narrower set of rules. Standardization also implies
that one technically correct method can be identified
for every aspect of accounting and then this can be
imposed on all preparers of accounts.
Harmonization versus standardization
Due to the variations between countries discussed
above, full standardization of accounting practices is
unlikely. Harmonization is more likely, as the agreement
of a common conceptual framework of accounting
practices.
The need for harmonization of accounting
standards
Each country has its own accounting regulation,
financial statements and reports prepared for
shareholders and other uses are based on principles
and rules that can vary widely from country to country.
Multinational entities may have to prepare reports on
activities on several bases for use in different countries,
and this can cause unnecessary financial costs.
The need for harmonization of accounting
standards
Furthermore, preparation of accounts based on
different principles makes it difficult for investors and
analysts to interpret financial information.
This lack of comparability in financial reporting can
affect the credibility of the entity’s reporting and the
analysts’ reports and can have a detrimental effect
on financial investment.
The need for harmonization of accounting
standards
The increasing levels of cross-border financing transactions,
securities trading and direct foreign investment has resulted
in the need for a single set of rules by which assets, liabilities
and income are recognized and measured.
The number of foreign listings on major exchanges around
the world is continually increasing and many worldwide
entities may find that they are preparing accounts using a
number of different rules and regulations in order to be
listed on various markets.
Advantages of global harmonization
Investors
Multinational companies
Governments of developing countries
Tax authorities
Regional economic groups
Large international accounting firms
Disadvantages of global harmonization
Different purposes of financial reporting
Different legal systems
Different user groups
Needs of developing countries
Nationalism
Cultural differences
Unique circumstances
The lack of strong accountancy bodies.
Barriers to harmonization
Different purposes of financial reporting
Different legal systems
Different user groups
Needs of developing countries
Nationalism
Cultural differences
Unique circumstances
The lack of strong accountancy bodies
Conceptual framework
Objectives
Meaning of conceptual framework
Advantages and disadvantages
Purpose
Components of the conceptual framework
Conceptual framework
A statement of generally accepted theoretical
principles
Forms the frame of reference for financial reporting
The principles provide the basis for the
development of new accounting standards and
the evaluation of those already in existence
Conceptual framework
The framework will form the theoretical basis for
determining which events should be accounted
for in reporting, how they should be measured and
communicated to the user.
What is the danger of not having a conceptual
framework?
Advantages of conceptual framework
The situation is avoided where resources are
channeled to standardizing accounting practice
Existence of conceptual framework helps reduce
probable political interference in the case of
national standards
Deals with both profit and loss and valuation of net
assets
Disadvantages of conceptual framework
It is not certain that a single conceptual framework
can be devised to suit the variety of users of financial
statement
The need for variety of accounting standards, each
produced for a different purpose
The task of preparing and implementing standards
easier is not guaranteed
Generally Accepted Accounting
Practice (GAAP)
It signifies all the rules from whatever source
which govern accounting.
It is usually a combination of the following:
National company law
National accounting standards
Local stock exchange requirements
Purpose of conceptual framework
Assist the IASB in the development of future IASs and in
its review of existing IASs;
Assist the IASB in promoting harmonization of
regulations, accounting standards and procedures by
reducing the number of alternative treatments
permitted by IASs;
Assist national standard-setting bodies in developing
national standards;
Assist preparers of financial statements in applying IASs
and in dealing with topics that are not subject to an IAS;
Purpose of conceptual framework cont’d
Assist auditors in forming an opinion as to whether
financial statements comply with IASs;
Assist users of financial statements in interpreting
the information contained in a set of financial
statements;
Provide those who are interested in the work of the
IASB information about its approach to the
formulation of IASs.
Components IASB’s Conceptual Framework
Chap 1: the objectives of general purpose financial reporting
Chap 2: the reporting entity
Chap 3: qualitative characteristics of useful financial
information
Chap 4: remaining text:

underlying assumptions

the elements of financial statements

recognition of elements of financial statements

Measurement of elements of financial statements

Concepts of capital and capital maintenance
Components IASB’s Conceptual Framework
Chap 1: the objectives of general purpose financial reporting
Chap 2: the reporting entity
Chap 3: qualitative characteristics of useful financial
information
Chap 4: remaining text:

underlying assumptions

the elements of financial statements

recognition of elements of financial statements

Measurement of elements of financial statements

Concepts of capital and capital maintenance
Objectives of general purpose financial reporting
The objective of financial statements is to provide information
about the
 financial position,
 financial performance and
 changes in financial position
of an entity that is useful to a wide range of users in making
economic decisions.‘
Who are the users of financial statement?
What are their information needs?
Underlying Assumptions
Going concern
The entity will continue in operation for the foreseeable
future.
It is assumed that the entity has neither the intention nor
the necessity of liquidation or of curtailing materially the
scale of its operations.
Disclosed in the financials
Underlying Assumptions cont’d
Accruals basis
The effects of transactions and other events are
recognized when they occur
(not as cash or its equivalent is received or paid)
and they are recorded in the accounting records and
reported in
the financial statements of the periods to which they
relate.
Qualitative characteristics of useful
financial information
Understandability
Relevance
Reliability
Comparability
Fundamental Qualitative characteristics of
useful financial information
Relevance
Faithful representation
Enhancing Qualitative characteristics
of useful financial information
Comparability
Verifiability
Timeliness
Understandability
Fundamental qualitative characteristics
Relevance
Information has the quality of relevance when it influences
the economic decisions of users by helping them evaluate
past, present or future events or confirming, or correcting,
their past evaluations.
The relevance of information is affected by its nature and
materiality
Information is material if its omission or misstatement could
influence the economic decisions of users taken on the basis
of the financial statements.
Faithful representation
Information is to represent faithfully the transactions
and other events that it purports to represent,
they must be accounted for and presented in
accordance with their substance and economic
reality and not merely their legal form.
Faithful representation
To be a perfectly faithful representation, information should
possess the following characteristics:
Completeness: contain all the necessary description and
explanation
Neutrality: free from bias
free from error: free from error within the bounds of materiality
It doesn’t mean perfectly accurate in all respects
Enhancing qualitative characteristics
Comparability
Information about a reporting entity is more useful if it
can be compared with similar information about
other entities and with similar information about the
same entity in different periods
It enables users to identify and understand similarities
in and differences among items.
Comparability
To ensure comparability, there must be:
Consistency : the use of the same methods for the
same items (consistency of treatment)
Disclosure of accounting policies and changes in
accounting policies
Comparability is not the same as uniformity
Verifiability
It means that different knowledgeable and
independent observers could reach consensus that a
particular depiction is a faithful representation.
It helps assures users that information faithfully represents
the economic phenomena it purports to represent.
Timeliness
It means having information available to decisionmakers in time to be capable of influencing their
decisions.
The older the information, the less useful it is
Understandability
Users must be able to understand financial statements.
Users must have reasonable knowledge of business and
economic activities
Complex matters should not be left out of financial
statements simply due to its difficulty if it is relevant
information
Information must be classified, characterized and
presented clearly and concisely
Elements of financial statement
Assets
Liabilities
financial position
Equity
Income
Expenses
financial performance
Elements of financial statement
Assets: A resource controlled by an entity as a result of
past events and from which future economic benefits are
expected to flow to the entity.
Controlled by an entity: control is the ability to obtain the
economic benefits and to restrict the access to others
Past events: the event must be past before an asset can
arise
Future economic benefits: these are evidenced by the
prospective receipt of cash
Elements of financial statement
Liability: A present obligation of the entity arising from past
events, the settlement of which is expected to result in an
outflow from the entity of resources embodying economic
benefits.
Obligation: A duty or responsibility to act or perform in a certain
way. Obligations may be legally enforceable as a
consequence of a binding contract or statutory requirement.
Outflow of economic benefits-this could be a transfer of cash,
or other property, the provision of a service, or the refraining
from activities which would otherwise be profitable
Elements of financial statement
Equity: The residual interest in the assets of the entity after
deducting all its liabilities
Equity may be sub-classified in the financial statements into
share capital, Income surplus and other reserves.
Some reserves are required by statute or other law, eg for the
future protection of creditors.
Elements of financial statement
Income
 Increases in economic benefits during the accounting
period in the form of inflows
or enhancements of assets
or decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity
participants.
Elements of financial statement
The definition of income includes revenue and gains.
Revenue is income that arises in the course of ordinary
activities, i.e. sales.
Gains represent other items that meet the definition of
income e.g. gains on disposal of non-current assets and
unrealized gains, e.g. on revaluation.
Elements of financial statement
Expenses.
Decreases in economic benefits during the accounting
period in the form of outflows
or depletions of assets
or incurrences of liabilities that result in decreases in equity,
other than those relating to distributions to equity participants.
Elements of financial statement
The definition of expenses includes losses as well as expenses
that arise in the course of ordinary activities.
Expenses that arise in the ordinary course of activities are
items such as wages, purchases and depreciation.
Losses include items such as on disposal of non-current assets
and unrealized losses, e.g. losses on revaluation.
Recognition of elements of financial statement
Recognition is the process of incorporating in the statement of
financial position or statement of comprehensive income an
item that meets the definition of an element and satisfies the
following criteria for recognition:
a) it is probable that any future economic benefit associated
with the item will flow to or from the entity; and
b) the item has a cost or value that can be measured with
reliability.
Recognition of Assets
It is probable that the future economic benefits
will flow to the entity
the asset has a cost or value that can be
measured reliably
There is sufficient evidence of its existence
Recognition of Liability
It is probable that an outflow of resources
embodying economic benefits will result from the
settlement of a present obligation
 the amount at which the settlement will take
place can be measured reliably.
There is sufficient evidence of its existence
Recognition of Income
An increase in future economic benefits related
to an increase in an asset or a decrease of a
liability has arisen
 it can be measured reliably.
Recognition of expenses
A decrease in future economic benefits related
to a decrease in an asset or an increase of a
liability has arisen
it can be measured reliably.
Measurement of elements of financial statement
Measurement is the process of determining the monetary
amounts at which the elements of the financial
statements are to be recognized and carried in the
statement of financial position and statement of
comprehensive income.
There are a number of different ways of measuring
elements of financial statements including:
Historical cost
Current cost
Realizable value
Present value
Measurement of elements of financial statement
Historical cost.
 Assets are recorded at the amount of cash or cash
equivalents paid or the fair value of the consideration
given to acquire them at the time of their acquisition
 Liabilities are recorded at the amount of proceeds
received in exchange for the obligation, or in some
circumstances (for example, income taxes), at the
amounts of cash or cash equivalents expected to be
paid to satisfy the liability in the normal course of
business
Measurement of elements of financial statement
Current cost.
Assets are carried at the amount of cash or cash
equivalents that would have to be paid if the
same or an equivalent asset was acquired
currently.
Liabilities are carried at the undiscounted amount
of cash or cash equivalents that would be
required to settle the obligation currently.
Measurement of elements of financial statement
Realizable value
 The amount of cash or cash equivalents that could currently
be obtained by selling an asset in an orderly disposal.
 Settlement value. The undiscounted amounts of cash or
cash equivalents expected to be paid to satisfy the liabilities
in the normal course of business.
Present value. A current estimate of the present discounted
value of the future net cash flows in the normal course of
business.
Measurement of elements of financial statement
Assignment 1
Which method is recommended by the framework?
The concept of capital and capital maintenance
There are two concepts of capital:
A financial concept of capital.
Capital = net assets or equity of the entity.
This concept should be used if the main concern of
the user of the financial statements is the
maintenance of the nominal value invested
capital.
This is used by most entities to prepare financial
statements.
The concept of capital and capital maintenance
A physical concept of capital.
Capital = productive capacity of the entity
(measured as units of output per day).
This method should be used if the main concern of
the user of the financial statements is the operating
capacity of the entity.
The concept of capital and capital maintenance
Capital maintenance means preserving the value of
the capital of the entity, and reporting profit only if
the capital of the entity has been increased by
activities and events in the accounting period.
IAS 2 INVENTORIES
Learning objectives
• Objective of IAS 2
• Definition
• Categories of inventory
• Measurement of inventory
• Cost of inventory
• Recognition and disclosure requirement
OBJECTIVE
• IAS 2 lays out the required accounting treatment for
inventories(stocks) under the historical cost system.
• It also lays out the recognition of an expense, including any writedown to net realizable value.
• It also provides guidance on the cost formulas that are used to assign
cost to inventories.
Definition
• Inventories are assets:
held for sale in the ordinary course of business;
 in the process of production for such sale; or
in the form of materials or supplies to be consumed in the
production process or in the rendering of services
Categories of inventories
• Goods purchased and held for resale
• Finished goods produced
• Work in progress being produced
• Raw materials (Materials and supplies awaiting use in the production
process)
• Consumable stores
Measurement/Valuation of inventories
• Inventories should be measured at the lower of cost and net
realizable value (NRV)
• Cost is defined as the amount incurred in bringing the items
of inventory to their present location and condition i.e. cost of
purchase and cost of conversion
• Net Realizable Value (NRV) is the estimated selling price in the
ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the
sale.
Cost of inventories
• The cost of inventories will consist of all costs of:
 Purchase
 Costs of conversion
 Other costs incurred in bringing the inventories to their present
location and condition
Cost of inventories
• Purchase cost shall include the following
Purchase price plus
 Import duties and other taxes plus
Transport, handling and any other cost directly attributable
to the acquisition of finished goods, services and materials
less
Trade discounts, rebates and other similar amounts
Cost of inventories
• Costs of conversion consist of two main parts:
Costs directly related to the units of production, eg direct materials,
direct labour
 Fixed and variable production overheads that are incurred in
converting materials into finished goods, allocated on a systematic
basis.
Cost of inventories
• Other costs include:
Any other costs should only be recognized if they are incurred in
bringing the inventories to their present location and condition.
Cost of inventories does not include
SAGS
• Storage costs (except costs which are necessary in the production
process before a further production stage)
• Abnormal amounts of wasted materials, labour or other production
costs
• General and administrative overheads not incurred to bring
inventories to their present location and conditions
• Selling costs
• SAGS
Try This
• Romeo imports spoons from many countries, packages them and exports
them to Italy.
• At the end of his reporting period he has an itemized list of the spoons in
stock. He has however incurred a range of expenses in obtaining these
spoons.
• In addition to the direct cost of their purchase, he has also paid carriage
inwards, import duties, carriage outwards and other handling costs related to
imports. He has also employed someone in the accounting department to
deal with the paper work.
• Romeo needs to know which cost he can include as part of the inventory cost
Cost formulae
• Cost of inventories should be assigned by specific identification of their
individual costs for:
 Items that are not ordinarily interchangeable
 Goods or services produced and segregated for specific projects
• but where inventories consist of a large number of interchangeable (ie
identical or very similar) items, the rule specified below is applicable:
first-in, first-out (FIFO) or
 weighted average cost formulas
The LIFO formula (last in, first out) is not permitted by the revised IAS 2.
Try this
Bought
Sold
2015
Jan
400
Apr
£
10 at £30 each
£
300
May
10 at £34 each
340
Nov 24 for £60 each
2015
8 for £50 each
1,440
Oct
20 at £40 each
800
40
1,440
32
Determine the closing stock using the
FIFO
LIFO
AVERAGE
What’s the effect of each valuation on profit?
1,840
Net Realizable Value
• Its the estimated selling price in the ordinary course of
business less the estimated costs of completion and the
estimated costs necessary to make the sale
• Any write-down to NRV should be recognized as an expense in
the period in which the write-down occurs.
• Any reversal should be recognized in the income statement in
the period in which the reversal occurs
Recognition as an expense
• The following treatment is required when inventories are sold.
The carrying amount is recognized as an expense in the period in
which the related revenue is recognized
The amount of any write-down of inventories to NRV and all losses of
inventories are recognized as an expense in the period the write-down
or loss occurs
The amount of any reversal of any write-down of inventories, arising
from an increase in NRV, is recognized as a reduction in the amount of
inventories recognized as an expense in the period in which the reversal
occurs
NRV is likely to be less than cost
when:
• An increase in costs or a fall in selling price
• A physical deterioration in the condition of inventory
• Obsolescence of products
• A decision as part of the company's marketing strategy to
manufacture and sell products at a loss
• Errors in production or purchasing
Disclosure requirements
• The following must be disclosed in accordance with IAS 2
Accounting policy adopted including the cost formula used
Total carrying amount classified appropriately
Amount of inventories carried at NRV
The amount of inventories pledged as security for liabilities
The write-down of inventories and the reversal of write-downs
Example 2
• An enterprise has three products in its inventory as follows;
Product
COST
NRV
A
B
GHS
10,000
11,000
GHS
12,000
15,000
C
12,000
9,000
TOTAL
33,000
36,000
• At what value should the inventory be stated in the balance sheet in accordance
with IAS 2?
Example 3
• Materials costing GHS15,000 bought for processing and assembly for
a profitable special order. Since buying these items, the cost price has
fallen to GHS12,500
• At what price should the inventory be included in the financial
statements?
Example 4
• Equipment was constructed for a customer for an agreed price of
GHS20,000. This has recently been completed at a cost of GHS18,600.
It has now been discovered that in order to meet certain regulations,
conversion with an extra cost of GHS5,000 will be required. The
customer has accepted partial responsibility and agreed to meet half
of the extra cost.
• Value the inventory for accounting purposes.
Try this
Calculate the cost of inventory in accordance with IAS 2 from
the following data relating to Boaz Ltd for the year ended 31st
May 2016.
GHS
Direct cost of can opener per unit
1
Direct labour cost of can opener per unit
1
Direct expenses cost of can opener per unit
1
Production overheads per year
600,000
Administration overheads per year
200,000
Selling overheads per year
300,000
Interest payment per
100,000
• There were 250,000 units of finished goods at the year
end.
• You may assume that there were no finished goods at
start of the year and that there was no work in
progress.
• The normal level of production is 750,000 units can
openers, but in the year ended 31st May 2007, only
450,000 were produced because of labour dispute.
 IAS 2 only permits the inclusion of production overheads in
the valuation of inventories and therefore administration,
selling and interest costs (unless interest costs meet the
requirements identified in the alternative treatment permitted
under IAS 23, Borrowing costs) are not relevant here.
 The abnormal costs associated with labour dispute will be
charged as an expense in the period they incurred.
 Therefore cost of finished inventory =GHS950,000
Try this
Inventory at 31 December for Boaz Ltd is GHS 146,000 valued
at cost. This includes obsolete inventory costing GHS 4,240
which will be given away free to a local children’s charity.
Explain with figures how inventory should be treated at the
end of the reporting year.
Partnership
Objectives
Introduction and Regulatory Frame work
✓Definition
✓Nature
✓Relationship among partners
✓Formation
✓Partnership accounts
Objectives
Changes in partnership constitution
✓Changes In Profit And Loss Sharing Ratio
✓Revaluation Of Assets
✓Goodwill
✓The Admission Of A New Partner
✓Outgoing Partner (Death and Retirement)
Objectives
Dissolution of partnership
✓Meaning of dissolution
✓Legal provisions for partnership dissolution
✓Accounting arrangement for dissolution
✓Piecemeal dissolution
Objectives
Conversion of partnership
✓Meaning
✓Reasons for conversion
✓Accounting arrangements
Amalgamation
Introduction and
Regulatory Frame work
LECTURE 4
Objective
Definition
Nature
Relationship among partners
Formation
Partnership accounts
Definition and meaning of partnership
Partnership is defined as the association of two or more individuals carrying
on business jointly for the purpose of making profits
The number of partners can range from two to twenty inclusive
On a limited occasion, an individual could be the only partner of a
partnership firm
However, this situation can only exist for six months during which the
remaining partner has to find other partners or liquidate the firm
The main examples of partnerships can be found within the professional
consultancy firms such as law and accountancy firms
Body not considered as
partnership/Scope
Company registered under the companies Act
Company, body corporate, or unincorporated association formed
under any other enactment
Body corporate formed in accordance with the law of any foreign
country
A joint venture without a firm name for one or more specific
operations
Relationships not considered as
partnership
Family ownership or co-ownership of property
Remuneration of a servant or agent through the share of profit
Joint venture
Nature of partnership
Any partnership duly registered under the Act (1962, Act 152)
qualifies to be called a firm
The word "firm" is used under the Act to mean a body corporate
formed by registration of a partnership in accordance with the Act
Section 12 of the Act states that:
"the firm shall be a body corporate under the firm name, distinct
from the partners of whom it composed, and capable forthwith
of exercising all the powers of a natural person of full capacity in
so far as such powers can be exercised by a body corporate;
Nature of partnership
notwithstanding any changes in the constitution of the
partnership, the firm shall continue to exist as a corporate body
until dissolved in accordance with section 51, 52 or 53 of this Act;
notwithstanding that the firm is a body corporate, each partner
therein shall be liable without limitation, for the debts and
obligations of the firm …
Nature of partnership
What the Act has done is to
✓create a firm capable of perpetual succession,
✓existence of which does not depend upon the changes in the
composition of its members,
✓with all the rights and obligations of a body corporate different
from those of its members
✓but the liability of whose members to the firm's liabilities are
unlimited.
Nature of partnership
Section 40 of the Act states as follows, "the fact that a
partner has ceased to be a partner in the firm shall not affect
the existence of the firm or the mutual rights and duties of
the other partners“
On the other hand, the Court may order the winding up of a
firm if it carries on business for more than six months with
fewer than two partners [Section 47(3)(b)]
Relationship between partnership
Section 34 of the Act states that the relationship between
partners is a fiduciary one and as such every partner acts as an
agent of the firm for the purpose of the business of the firm.
Every partner is expected to:
❖"render to every other partner full information of all things
affecting the firm;
❖account to the firm of any benefit derived by him without the
consent of the other partners from any transaction concerning
the firm or from any use by him of the firm's property, name or
business connection."
Relationship between partnership
In addition "if a partner, without the consent of the other partners
directly or indirectly carries on any business of the same nature as,
and competing with, that of the firm, he shall account for, and pay
over to the firm, all profits made by him in that business."
Relationship between partnership
Section 16 states: "every partner in a firm shall be jointly
and severally liable to the firm and the other partners for
all debts and obligations of the firm incurred while he is a
partner."
If a firm is unable to meet all its maturing obligations out
of its own assets, the partners must make good any
balance up to the limit of their entire private possessions.
Formation/Registration of a
partnership
It is unlawful for any partnership to carry on business unless
the firm is registered in accordance with the Act, 1962 (Act
152).
Section 5(1) requires that "registration under this Act shall be
effected in manner following, that is to say, there shall be sent
or delivered to the Registrar for registration a copy of the
partnership agreement and a statement in the prescribed
form signed by all the partners containing the following
particulars namely:
Formation of a partnership
❑the firm name of the partnership;
❑the general nature of the business;
❑the address of;
✓the principal place of business of the partnership; and
✓all other places in Ghana at which the business is carried on;
Partnership formation
❑the names and any other former names, residential
addresses and business occupations of the partners;
❑the date of commencement of the partnership, unless the
partnership has commenced more than twelve months prior
to the date of the statement;
Reasons for refusing partnership
registration
If the partnership is not registered in Ghana
If any of the businesses carried on, or to be carried on by the firm
is unlawful
If the firm name is misleading or undesirable
If any of the partners is an infant, or unsound mind, has been
guilty of fraud or dishonesty or an undischarged bankrupt
If the statement or agreement is incomplete, illegal or inaccurate
The partnership agreement
The name and business of the firm
Amount of capital and whether the capital is to earn interest
Profit and loss sharing ratio
Salary of partners
Partners’ drawings (limit and interest)
Capital account (fixed or fluctuation)
The partnership agreement
The keeping of books and accounts.
The date for the commencement of the partnership and its possible
duration
The method for the valuation of assets, especially goodwill in case of an incoming or outgoing partner and dissolution of the
partnership.
How disputes shall be settled
Rules applying in the absence of
agreement (section 35)
All partners shall be entitled to share equally in the capital and
profits of the firm and shall contribute equally towards the losses
sustained
The firm shall indemnify every partner in respect of payments
made and personal liabilities incurred by him,
✓In the ordinary and proper conduct of the business of the firm;
or
✓In or about anything necessarily done for the preservation of the
property of the firm;
Rules applying in the absence of
agreement (section 35)
A partner making for the purpose of the firm any actual
payment or advance beyond the amount of capital which he
has agreed to subscribe shall be entitled to interest at a rate of
5% p.a. from the date of payment or advance
A partner shall not be entitled to payment of such interest
before the ascertainment of the profit of the firm
Rules applying in the absence of
agreement (section 35)
Every partner may take part in the management of the business of
the firm
No partner shall be entitled to remuneration for acting in the firm’s
business
No person should be introduced as partner without his consent and
the consent of all the existing partners;
Rules applying in the absence of
agreement (section 35)
Any difference arising as to ordinary matters connected
with the firm’s business may be decided by a majority of
the partners, but no change may be made in the nature of
the firm’s business without the consent of all the existing
partners
The partnership books and accounts shall be kept at the
place of business of the firm or the principal place of
business if there is more than one
Cessation of membership of a firm
Death
His becoming an alien enemy during time of war;
An insolvency order being made against him under the
provisions of the Insolvency Act 1962 (Act 153)
If the other partners so elect in writing, a partner shall cease
to be a partner in the firm if he suffers his interest in the
partnership to be charged under section 20 of the Act for his
separate debt.
Retirement as defined in the partnership agreement
Advantages of partnership
A partnership shares business risk between more than one person.
Each partner can develop special skills upon which the other
partners can rely.
Greater resources will be available since more individuals will be
contributing to the business.
Disadvantages of partnership
There may be disputes in running the business
Partners are jointly and severally liable for their partners. Thus if one
partner is being sued in relation to the business, all partners share
the responsibility and potential liability.
Keeping of Accounts (section 32)
Every firm shall cause to be kept proper account with respect to its financial
position
Every firm shall, at intervals of not more than fifteen months be caused to
prepare profit and loss account
Disclosing the following:
✓All sums of money received and expended by or on behalf of the firm and
the matters in respect of which the receipt and expenditure takes place
✓All sales and purchases by the firm of property, goods and services
✓The assets, liabilities of the firm and the interests and partners therein
Accounts of partnership
Capital account
✓Separate capital account must be opened for each partner
✓The capital account records the amount of capital contributed by
a particular partner to the firm in accordance with the partnership
agreement
✓ Preferably, this account should record only the increases or
decreases in capital introduced into or withdrawn from the firm in
accordance with the partnership agreement.
Accounts of partnership
Current account
✓In the situation where a fixed capital account is kept, a
separate current account is opened for each partner
✓The current account is credited with a partner's share of
profits, any salary and commission entitlements, Interest
allowed on capital and loan accounts while it is debited with a
partner's share of losses, drawings, interest charged on
drawings all in accordance with the partnership agreement.
Accounts of partnership
Drawings Account
Normally a separate drawings account is kept to record all drawings
(both cash and goods) withdrawn from the firm by a partner the
balance of which is transferred to the respective current accounts of
the partners at the end of the accounting period.
Accounts of partnership
Drawings Account
It is important to note that all drawings, either in form of
cash, goods or other assets should be debited to either the
drawings account in the first instance to be transferred in
total to the current account or debited directly to the current
account
Under no circumstances should drawings be debited to the
profit and loss accounts, as "drawings" does not represent a
charge against profit.
Accounts of partnership
A credit balance on the current account indicates the
amount of undrawn profits
A debit balance indicates that a partner has overdrawn on
his account.
Usually to avoid such a situation from arising, the
partnership agreement will indicate that an interest at an
agreed rate shall be charged on all overdrawn current
accounts.
Partners’ loan account
Financial statement of partnership
Manufacturing Account
The trading, Profit and loss account
Appropriation account
Partners current account
Capital account
Balance sheet
ACTIVITY 1
Taylor and Clarke share profits in the ratio: Taylor, three-fifths;
Clarke, two-fifths.
They are entitled to 5% interest on capital.
Taylor invested £20,000 capital and Clarke invested £60,000
capital.
Clarke receives a salary of £15,000.
Taylor is to be charged £500 interest on drawings and Clarke
£1,000.
Net profits amounted to £50,000.
Drawing of £15,000 and £26,000 for Taylor and Clarke
respectively
Try this
Black, Brown and Cook are partners. They share profits and losses in the
ratios of 2/9, 1/3 and 4/9 respectively. For the year ended 31 July 20X2,
their capital accounts remained fixed at the following amounts:
£
Black
60,000
Brown
40,000
Cook
20,000
They have agreed to give each other 6 per cent interest per annum on their
capital accounts. In addition to the above, partnership salaries of £30,000
for Brown and £18,000 for Cook are to be charged. The net profit of the
partnership, before taking any of the above into account was £111,000.
Black and Brown withdrew £4,000 and £5,000 worth of goods respectively
during the period. The firm charges 10% interest on drawings. You are
required to draw up the appropriation account of the partnership for the
year ended 31 July 20X2.
Homework
41.9 of Frank wood
Thank You
Any Question?
Changes in partnership
constitution
Changes in the constitution of
partnership
• There is a change in the constitution whenever there is:
✓Admission of a new partner
✓Retirement of a partner
✓Death of a partner
• There may also be a constructive change whereby the original
partners remain the same but there is a change in the agreed
profit and loss sharing ratios
Reasons for Change in Profit and Loss Ratio
• A partner may now not work as much as in the past, possibly
because of old age or ill-health.
• A partner’s skills and ability may have changed, perhaps after
attending a course or following an illness.
• A partner may now be doing much more for the business than
in the past.
Changes in the constitution of
partnership
• Section 12(2) states that ‘notwithstanding any changes in the
constitution of the partnership, the firm shall continue to exist
as a corporate body until dissolved in accordance with section
51, 52 or 53 of this Act’
• Section 39(1) state as follows: “A partner shall cease to be a
partner in the firm in the event of,
• Death;
• His becoming an alien enemy during time of war;
• An insolvency order being made against him under the
provisions of the Insolvency Act 1962 (Act 153)
Changes in the constitution of
partnership
• Section 17 states as follows:
✓“A person who is admitted as a partner into an existing
firm shall not thereby become liable to the creditors of
the firm for anything done before he becomes a partner
✓A partner who retires from a firm shall not thereby
cease to be liable for the debts or obligations of the firm
incurred before his retirement
Changes in the constitution of partnership
✓A retiring partner may be discharged from any existing liability
by an agreement to that effect between himself and the firm and
the creditor and this agreement may be either express, or inferred
as a fact from the course of dealing between the creditor and the
firm as newly constituted
✓Where a person deals with a firm after the retirement of any
partner whom he knew to be a partner in the firm, he shall be
entitled to treat the retired partner as still being a partner until he
has notice of the retirement and the retired partner shall be liable
accordingly.
Changes in the constitution of partnership
✓If any such person had dealings with the firm prior to the retirement
he shall not be deemed to have notice of the retirement unless he
has actual knowledge thereof, but an advertisement in a daily
newspaper circulating in the district in which is situated the principal
place of business of the firm shall be notice to persons who have not
had dealings with the firm prior to the retirement.
Changes in the constitution of partnership
✓The estate of a partner who dies or has an insolvency order made
against him under the Insolvency Act, 1962 (Act 153) or subject as
provided by subsections (4) and (5) of this section, a partner who
retires, shall not be liable for any debts or obligations of the firm
contracted or incurred after the date of the death, insolvency order,
or retirement respectively”.
Summary of accounting arrangements
for a change in constitution
• Any change in the constitution of a partnership by way
of admission, retirement, death etc. results in a change
in the profit and loss sharing ratio.
• Immediately before the change occurs, all the assets and
liabilities including goodwill should be revalued
• and any revauation profit or loss credited or debited to
the partners’ capital accounts in accordance with the
existing profit and loss sharing ratio.
Revaluation of assets
Revaluation of assets
• The credit balance on the Revaluation Account
represents revaluation surplus
• This is credited to the old Partners’ Capital Accounts
according to old profit sharing ratio
• If the asset is revalued lower than the book value, the
entries are as follows:
✓Debit the Revaluation Account
✓credit the Asset Account.
Revaluation of assets
• The debit balance on the revaluation account represents revaluation
deficit
• This is debited to the old Partners’ Capital Accounts according to old
loss sharing ratio
Revaluation of assets
• The new firm (after admission of the new partner) may decide to
maintain the assets in the books as revalued
• On the contrary, the new firm (after admission of the new partner),
may decide to revert the valuation of the assets to their book values
prior to the admission of the new partner
Revaluation of assets
• If the revaluation resulted in a revaluation surplus, the
reversal is effected by debiting the new partner’s capital
(according to new profit/loss sharing ratio) and
crediting the Asset Account
• If the revaluation resulted in revaluation deficit, the
reversal is effected by debiting the Asset Account and
crediting the new partner’s Capital Accounts (according
to new profit/loss sharing ratio)
The following is the balance sheet as at 31 December 2015 of Kwame and Marfo,
who shared profits and losses in the ratio 2:1. From 1 January 2016 the profit and loss
sharing ratio is to be altered to Kwame one-half; Marfo one-half.
Balance Sheet as at 31 December 2015
Assets
GH¢
GH¢
Premises (at cost)
65,000
Equipment (at cost less depreciation)
15,000
80,000
Stock
20,000
Debtors
12,000
Bank
8,000
40,000
120,000
Financed by:
Capitals: Kwame
70,000
Marfo
50,000
120,000
The assets were revalued on 1 January 2016 to be:
Premises GH¢90,000; Equipment GH¢11,000. Other
assets values were unchanged.
Account for the revaluation in the partnership books
Assets
Premises (at cost)
Equipment (at cost less depreciation)
Stock
Debtors
Bank
Financed by:
Capitals: Kwame
Marfo
GH¢
20,000
12,000
8,000
GH¢
90,000
11,000
101,000
40,000
141,000
84,000
57,000
141,000
SCHOOL OF BUSINESS
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
KWAME NKRUMAH UNIVERSITY OF SCIENCE
AND TECHNOLOGY, KUMASI, GHANA
ACF
Intermediate Accounting
• Lecture 9
Beatrice Sarpong-Danquah
bosei.knust.ksb@gmail.com // bosei@knust.edu.gh
COPYRIGHT March, 2021
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Joint Venture
1
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Objectives
• Definition and meaning of joint venture
• Characteristics of joint venture
• Difference between joint venture and partnership
• Operation and accounting arrangement relating to joint
ventures
2
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Definition and meaning of joint venture
• A joint venture is a contractual arrangement by which two or
more parties (venturers) agree to undertake a specific
economic activity that is subject to a joint control
• Sometimes a particular business venture can best be done by
two or more businesses joining together to do it instead of
doing it separately
• The joining together is for that one venture only
• it is not joining together to make a continuing business.
3
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Characteristics of joint venture
• There is an agreement between two or more parties
• The agreement is made for the execution of a specific
venture
• No specific firm name is used for the joint venture business
• It is of a temporary nature
• Hence, the agreement regarding the venture automatically
stand terminated as soon as the venture is completed
4
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Characteristics of joint venture
• The co-venturers share profit and loss in the agreed ratio
✓ However, in the absence of any other agreement between
the co-venturers, the profits and losses are to be shared
equally
• During the tenure of joint venture, the co-venturers are free
to continue with their own business unless agreed otherwise
5
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Difference between joint venture and partnership
6
Joint venture
Partnership
• Shorter period
• Two or more companies
• Aims to undertake a specific task
• Regulated by contract law
• Only one set of accounts is
prepared for the whole venture
• Business not carried under any
firm’s name
• Longer period
• Two or more individuals
• Aims to make profit
• Regulated by Act 152 of 1962
• Accounts is prepared annually
• Business carried under firm’s
name
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Types of recording
1. Where no set of books are opened
2. Where a set of books is opened
7
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for joint venture where
no set of books are opened
• Each person (venturer) opens a “Joint Venture” Account in
his books
• debited with that person’s expenditure on the venture
• credited with his receipts on joint account
• In effect, therefore, the individual Joint Venture Accounts are
treated as though they were ordinary personal accounts
8
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for joint venture where
no set of books are opened
• The books opened by each partner will be titled ‘JOINT
VENTURE WITH’ (the other party)
• All payments made are debited and receipts credited
• When a venturer receives a value (sales, cash and take-over
any item) he will credit it in his books
• When he parts with value (purchases, expenses and cash) he
will debit it in his books
9
0
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for joint venture where
no set of books are opened
• When items agreed on as part of the venture transaction
change hands (one venturer send goods to the other for
sale) no record is made in the account
• However , when items which are not part of the agreement
changes hand (one venturer sending cash to the other) a
record is made in the account
10
1
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for joint venture where
no set of books are opened
• When the venture comes to an end
• Each party transmits to the other particulars of his
disbursements and receipts
• A combined memorandum statement is prepared showing
the complete details of the transaction
11
2
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for joint venture where
no set of books are opened
• Debits are copied in summary to debit and credits to credit
in the memorandum account
• Profit or loss is determined and shared
• Settlement made
12
3
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Illustration
• On 1st January, Ade of Odumase and Nick of Patasi entered into a joint
venture for the sale of Agro-Chemicals. Profits and losses were shared
equally between them. On 2nd February, Ade paid GH¢1,000 for the
goods, and in addition, Freight, GH¢40; Railway Charges GH¢20; and
Sundry Expenses, GH¢25.
• Nick made the following payments on account of the joint venture:
•
6th March Government Duty GH¢40.50
•
7th April
Warehouse Charges GH¢14.50
•
9th May
Postages and Sundries GH¢5.50
• On 10th May, Nick sold the entire stock for GH¢1,440.
13
4
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Illustration
• Prepare a statement showing the result of the
combined transactions and also the Joint Venture
Account in each person’s books, assuming the final
settlement between the venturers was completed on
10th May.
14
5
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Joint venture with Ade
6/3 Govt Duty
7/4 Warehouse Charges
9/5 Postage & sundry
10/5 Share of Profit
10/5 Settlement
40.50
14.50
5.50
147.25
1232.25
1440.00
10/5 Sales
In the books of Nick
15
1440.00
1440.00
6
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Joint venture with Nick
2/2 Purchases
2/2 Freight
2/2 Railway charges
2/2 Sundry Expenses
10/5 Share of profit
1000.00
40.00
20.00
25.00
147.25
1232.25
10/5 Settlement
In the books of Ade
16
1232.25
1232.25
7
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Memorandum Joint venture A/C
2/2 Purchases
2/2 Freight
2/2 Railway charges
2/2 Sundry Expenses
6/3 Govt Duty
7/4 Warehouse Charges
9/5 Postage & sundry
10/5 Profit: Nick (1/2*294.5)
Ade (1/2*294.5)
17
1000.00
40.00
20.00
25.00
40.50
14.50
5.50
147.25
147.25
1440.00
10/5 Sales
1440.00
1440.00
8
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Where a set of books is opened
•Two types
•Complete set of books
•Special set of books
18
9
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for special set of
books
• One of the partners will record the whole of the transactions
in his books
• Personal account for the partners are opened in addition to
the joint venture account
• The accounts for the partners are titled partner’s account
e.g. John’s Account
19
0
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for special set of
books
• Here the recording in the individual books are in the direct
opposite side to that under ‘no set of books’ system
• When a venturer receives a value, it is debited
• When he parts with a value he is credited.
20
1
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for special set of
books
• The joint venture account is not preceded by the word
‘memorandum’
• The entries in the joint venture account are same as in the
memorandum joint venture account under the ‘no set of
books’ system
21
2
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Illustration
• On 1st January, Ade of Odumase and Nick of Patasi entered into a joint
venture for the sale of Agro-Chemicals. Profits and losses were shared
equally between them. On 2nd February, Ade paid GH¢1,000 for the
goods, and in addition, Freight, GH¢40; Railway Charges GH¢20; and
Sundry Expenses, GH¢25.
• Nick made the following payments on account of the joint venture:
•
6th March Government Duty GH¢40.50
•
7th April
Warehouse Charges GH¢14.50
•
9th May
Postages and Sundries GH¢5.50
• On 10th May, Nick sold the entire stock for GH¢1,440.
22
3
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Illustration
• Prepare a statement showing the result of the
combined transactions and also the Joint Venture
Account using the special set of books method
assuming the final settlement between the venturers
was completed on 10th May.
23
4
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Nick’s Account
10/5 Sales
1440.00 6/3 Govt Duty
7/4 Warehouse Charges
9/5 Postage & sundry
10/5 Share of Profit
10/5 Settlement
1440.00
24
40.50
14.50
5.50
147.25
1232.25
1440.00
5
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Ade’s Account
10/5 Settlement
1232.25 2/2 Purchases
1232.25
25
1000.00
2/2 Freight
40.00
2/2 Railway charges
20.00
2/2 Sundry Expenses
25.00
10/5 Share of profit
147.25
1232.25
6
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Joint venture A/C
2/2 Purchases
2/2 Freight
2/2 Railway charges
2/2 Sundry Expenses
6/3 Govt Duty
7/4 Warehouse Charges
9/5 Postage & sundry
10/5 Profit: Nick (1/2*294.5)
Ade (1/2*294.5)
26
1000.00
40.00
20.00
25.00
40.50
14.50
5.50
147.25
147.25
1440.00
10/5 Sales
1440.00
1440.00
7
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for a complete set of
books
• A joint bank account may be opened and the transaction
recorded in a manner precisely similar to those of ordinary
partnership
• Each partner’s (venture’s) capital account being credited with
the amount which he pays into the joint venture
• Interest on capital is usually taken into consideration, and
the profit or loss are shared based on agreed ratios
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8
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for a complete set of
books
• It is not usually necessary to open separate accounts
for purchases, sales, and expenses
• Such items are normally fewer in number and may be
posted direct to the joint venture account from the
cash book
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9
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for a complete set of books
•When the co-venturers introduce cash into the
joint venture,
• DR Joint Bank Account
• CR Capital Account of each co-venturer; with the
amount introduced
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0
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for a complete set of books
•On making purchases for the joint venture out of
the funds in the joint bank account
• DR joint venture account
• CR Joint Bank account with the amount involved
30
1
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for a complete set of books
•On making purchases out of the personal
resources of the co-venturer
•DR Joint venture account
•CR The capital account of the co-venturer
concerned with the amount involved
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2
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for a complete set of books
•On making cash/credit sales
•DR Joint Bank/ Debtors account
•CR Joint venture with the amount involved
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3
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for a complete set of books
•On incurring expenses on the joint venture out
of joint funds in the joint bank a/c
•DR Joint venture A/C
•CR. Joint Bank A/C with the amount involved
33
4
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for a complete set of books
•On incurring expenses on the joint venture
paid personally by a co-venturer
•DR Joint Venture A/C
•CR the Capital of the co-venturer concerned with
the amount involved
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5
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for a complete set of books
•When a co-venturer takes over joint venture
stocks
•DR the capital A/C of the co-venturer concerned
•CR Joint venture A/C
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6
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting entries for a complete set of books
•The joint venture account is closed off and
transferred to the capital account of the
partners
•When the partners are paid the transaction
will be between the capital account of the
partners and the joint bank account
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Illustration
• Esenam and Etonam entered in to a joint venture, contributing
GH¢30m and GH¢25m respectively into a joint bank account.
They decided to share profits and losses in the ratio of 3:2
respectfully. They purchased goods of GH¢35m by cheque and
GH¢20m from Etonam. Cash sales amounted to 60m. Elorm
bought goods of GH¢15m from the joint venture. Expenses of
GH¢15m were settled with a cheque, while Esenam also paid
expenses of GH¢10m from his personal resources. Elorm settled
her account with a cheque and Etonam took over the remaining
37 stock valued at GH¢10m.
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Illustration
•Required
•Show how the above transactions will appear in the
necessary accounts of the joint venture.
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9
SCHOOL OF BUSINESS
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
KWAME NKRUMAH UNIVERSITY OF SCIENCE
AND TECHNOLOGY, KUMASI, GHANA
Thank You
• For any concerns, please contact
• bosei@knust.edu.gh// bosei.knust.ksb@gmail.com//0501364541
COPYRIGHT March, 2021
SCHOOL OF BUSINESS
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
KWAME NKRUMAH UNIVERSITY OF SCIENCE
AND TECHNOLOGY, KUMASI, GHANA
ACF
Intermediate Accounting
• Lecture 9
Beatrice Sarpong-Danquah
bosei.knust.ksb@gmail.com // bosei@knust.edu.gh
COPYRIGHT March 2021
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting for Royalties
1
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Objectives
• Introduction
• Meaning of royalties
• Examples of royalties
• Definition of associated terms
• Accounting treatments
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Meaning of royalties
• Some businesses, in their operations rely on other entities
and individuals by using some assets of such individuals for a
fee
• Such payment made to the owner of an asset is what is
referred to as royalty
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Examples of royalties
✓Some publishing houses publish and sell the work of some
authors at a fee (royalties) to such authors
✓Mining companies pays fees (royalties) to owners of land for
the right to extract minerals
✓Fashion industry: designers license the right to use their
names on items of clothing in exchange for a fee (royalties)
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Associated terms
• Landlord/lessor
• Tenant/lessee
• Minimum rent
• Short workings
• Recoupment of short workings
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Associated terms
• The landlord or the lessor is the owner of the asset who
leases it out
• The landlord therefore receives the royalty and considers it
as income
• The tenant or the lessee is the one to whom the asset is
leased and therefore has to make the royalty payment to the
lessor
• The royalty payment is an expense to the lessee
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Associated terms
• Minimum rent is the guaranteed minimum amount that the
lessee must pay to the lessor every year for the right to use
the asset
• Usually in royalty agreements a minimum rent clause is
incorporated to protect the landlord
• Therefore, where such a clause exists, the landlord must at
least receive the minimum rent from the lessee every year.
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Associated terms
• This minimum yearly royalty is payable irrespective of
whether, for example, the quarry is worked or not and thus
the landlord is assured of this as regular income
• The minimum rent is variously known as dead rent, certain
rent, fixed rent, rock rent
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Associated terms
• Short workings is the excess of the minimum rent over the
actual royalty
• In some years, the actual amount of royalty to be paid by the
lessee may be less than the minimum rent
• In such situations, the amount by which the royalty falls
short of the minimum rent is referred to as short workings
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Recoupment of short workings
• Usually, lease agreements containing the minimum rent
clauses may also contain a clause that allows the lessee to
offset the short workings of the previous periods against the
larger output of later years, when the royalties payable are in
excess of the minimum rent.
• Such clauses convey what is known as the right to recoup
short workings or recoupment of short working clause.
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Recoupment of short workings
• Sometimes the short workings occur not as a result of
inefficiency on the part of the lessee, but for factors such as
strikes, lockouts, or initial difficulties in establishing a market
for the business in a competitive environment
• Therefore, there is the need to protect the lessee
• This is achieved by including in the royalty agreement a
clause, which permits the lessee to be reimbursed or recoup
short workings in subsequent periods when the actual
royalty is greater than the minimum rent
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Recoupment of short workings
• Thus, in the recoupment of short working clause, the lessor
promises to refund short-workings to the lessee in
subsequent good years in which the actual royalty is greater
than the minimum rent
• However, the right of the lessee to recoup short workings
could be limited to a stated period of time.
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Recoupment of short workings
• For example it may be limited to the first five years of the
agreement
• After the stated time period, no recoupment is allowed
• It could also be a floating right, in which case recoupment is
allowed in say, the year following the year of short-workings.
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4
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of
the lessee
•Accounts involved:
•Royalties payable account
•Landlord’s account
•Short workings recoverable account
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5
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of
the lessee
i. Where the actual royalty payable in any year is greater
than/equal to the minimum rent, the actual royalty
payable is recorded by
• Dr Royalties Payable
• Cr Landlord A/C
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6
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of
the lessee
ii. Where however, the actual royalty payable in any year is
less than the minimum rent,
• Dr Royalties Payable with actual royalties
• Dr Short-workings Recoverable A/c with the amount of
short-workings
• Cr Landlord’s A/C with the minimum rent
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7
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of
the lessee
iii. To pay the royalties to the landlord
• Dr Landlord’s A/c
• Cr Cash/Bank A/c
with the balance in the landlord account
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8
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of
the lessee
iv.The balance on royalties payable account is
transferred to the P & L a/c or manufacturing a/c by
• Dr Profit and Loss/manufacturing A/c
• Cr Royalties Payable A/c
with the balance on the royalties payable account
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9
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of
the lessee
v. In a year in which short-workings can be recouped, two
conditions must be met
❖First the actual royalties must be greater than the minimum
rent.
▪ meaning, the maximum amount, which can be recouped , is
the actual royalties in excess of the minimum rent
▪ In other words, it is the difference between the actual
royalties
and
the
minimum
rent.
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of
the lessee
❖Second, the amount of short-workings to be
recouped depends on the amount of short-workings
which the lease agreement allows to be recouped in
any year
❖Therefore, if for instance, in a particular year, the
actual royalties is greater than the minimum rent by
50m cedis but the agreement allows short-workings of
20 20m cedis to be recouped in that year,
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of the lessee
❖then only 20m cedis short workings can be
recouped in that year
▪To recoup short-workings in any year
•Dr Landlord’s A/c
•Cr Short-workings Recoverable A/c
With the amount of short-workings being recouped
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2
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of the lessee
vi. Short-workings which can not be recouped is
transferred to the profit and loss a/c by:
•Dr Profit and loss a/c
•Cr Short-workings Recoverable A/c
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3
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Illustration
Nana Ama leased a quarry to Enyonam
Company Limited for a period of four (4) years
at minimum rent of GH¢2,000 per annum for a
royalty of GH¢10 per tonne. Enyonam Company
Limited was granted the right to recoup
shortworkings within the first three years only.
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SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Illustration
Production during the period
Year
Tones
2010
120
2011
180
2012
260
2013
400
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5
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Illustration
You are required to prepare:
Royalty payable account
Landlord Account
Shortworkings recoverable account
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6
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of the lessor
•Accounts involved
•Rent receivable account
•Tenant’s account
•Short workings allowable account
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7
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of the lessor
i. When the royalties receivable in any year is
greater than the minimum rent
Dr. Tenant’s (Lessee) A/c
Cr. Royalties Receivable A/c
with the actual royalties
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8
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of the lessor
ii. When the royalties in year is less than the
minimum rent,
Dr. Tenant’s A/c with minimum rent
Cr. Royalties Receivable A/c with the actual royalty
Cr. Short-workings Allowable A/c with the shortworkings
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9
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of the lessor
iii. When the landlord receives the royalty
Dr. Cash/Bank A/c
Cr. Tenant’s A/c
29
0
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of the lessor
iv. The royalty receivable is an income which has to
be transferred to the profit and loss account by:
Dr. Royalties Receivable A/c
Cr. P & L A/c
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1
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of the lessor
v. When short workings are refunded
Dr. Short-workings allowable A/c
Cr. Tenant’s A/c
with the short-workings recouped
31
2
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Accounting arrangements in the books of the lessor
vi. Short-workings, which cannot be recouped by the
tenant is considered as some income. This has to be
transferred to the Profit and Loss account by:
Dr. Short-working Allowable A/c
Cr. Profit and Loss A/c
with the short-workings which cannot be recouped
32
3
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Illustration
• Ledzi Construction Ltd. leased a stone quarry from the
Adehyeman Royal family on 31st December 2001. The
agreement provide for the minimum rent of GH¢150,000
per annum and a royalty of GH¢0.50 per tonne of stone
extracted. The agreement also provides for
shortworkings to be recouped two years immediately
following its occurrence.
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4
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Illustration
• The following are the production figures for Ledzi
Construction Ltd for the first five years:
Years
1
2
3
4
345
Quantity
253,800
259,200
270,600
408,000
540,000
5
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
Illustration
•You are required to make the appropriate ledger
entries in the books of Adehyeman Royal family to
record the above transaction.
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6
SCHOOL OF BUSINESS
SCHOOL OF BUSINESS
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI,
GHANA
KWAME NKRUMAH UNIVERSITY OF SCIENCE
AND TECHNOLOGY, KUMASI, GHANA
Thank You
• For any concerns, please contact
• bosei@knust.edu.gh// bosei.knust.ksb@gmail.com
COPYRIGHT March 2021